Lesson 3 of 8 · All lessons in this module
- Mean, median, mode and outliers
- Quantiles, box plots and their uses
- Range, mean absolute deviation, variance and standard deviation
- Target downside deviation and coefficient of variationVideo lesson
- Skewness and kurtosisVideo lesson
- Scatter plots, covariance and correlation
- Limits of correlation analysis
- Integrated cases: describing one return series from raw data
Lesson 3 of 8 · 14 min
Range, mean absolute deviation, variance and standard deviation
Dispersion measures how widely returns scatter around their mean; if the mean is the reward, dispersion is the risk.
In short
- Range = maximum − minimum: simple, but it uses only two observations and is driven by outliers.
- Mean absolute deviation (MAD) averages the absolute distances from the mean, dividing by n.
- Sample variance averages squared deviations but divides by n − 1, the degrees of freedom left after estimating the mean.
- Standard deviation is the square root of the variance and is in the data's own units, so it is the usual risk figure.
- These are measures of absolute dispersion; relative dispersion (the coefficient of variation) follows in the next lesson.
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